The political squabbling and posturing accompanying efforts at financial reform have exposed basic flaws in the vast network of banking and trading services. None is more unsettling than the fact that both the existing system and the presumed panacea of additional regulatory layers turn out upon close inspection to be more sieves than shields. Aside from the size of the bureaucratic footprint, especially the omnivorous "consumer protection agency" which would insert the Federal Reserve into the minutiae of everyone's life, financial regulation suffers from several inherent deficiencies.

Financial institutions have become so complex and have their fingers in so many pies that no single regulatory body can match their scope. This defect is aggravated by the communication between regulatory bodies being tangential at best. Furthermore, the revolving door that allocates skilled employees among industry, government, and lobbyists makes it difficult to sustain consistent, effective, and impartial oversight. Finally, there is one characteristic of the financial service business as it is constructed today that makes it almost impossible to regulate. Whenever a particular regulation is crafted industry attorneys and technicians, often supplemented by the crafters themselves, immediately get to work devising new products that will circumvent it. Usually they are successful.

However, there is a path, illuminated by a few mavericks, that could address financial uncertainty. Everyone is now aware that the financial services that used to be called investing have been turned into a casino. Even mundane areas such as money market funds, corporate treasuries, and "value" investors (like Warren Buffett) have been discovered to hold risky derivatives. Derivatives themselves have become lucrative products with a market worth of several hundred trillion dollars. They and similar entities can no longer be banned in one or two countries as financial globalization will allow them to move elsewhere. In addition, pressure on one side of the financial product balloon will just create expansion in other sectors. For instance, even as a crackdown on credit default swaps and collateralized debt obligation was being debated it became possible for speculators to bet on life insurance awards, divorce settlements, and movie box office receipts. Trying to regulate speculation is like trying to mop up a flood with a sponge.

A more meaningful tactic would be to re-impose a version of the Glass-Steagall Act (passed in 1933, voided in 1999), which would produce two different types of financial institutions that would not exist under the same corporate roof. One new type would handle only deposits and loans (i.e., traditional banking). It would be tightly controlled with generous federal deposit insurance, conservative capital ratios, and a requirement that the original lender retain at least a portion of all loans.

The other type of institution would encompass all the various aspects of the financial casino. This type would operate with complete transparency, but with no federal insurance and with rules similar to gaming, not banking. Anti-fraud statutes would be strictly enforced. No bond rating paid for by the issuer would be taken seriously. No institution would be "too big to fail." If the country needed to raise money from the financial system it would not tax banks, but would attach a tax to casino transactions. If this reform were in place the shield would exist where people most expect safety. The sieve would be over the casino, where it can't be easily plugged anyway. There would be a clear warning on every casino product: buyer beware.